Electric truck and drone package delivery manufacturer Workhorse Group said it is making progress developing a truck-mounted drone system that will comply with Federal Aviation Administration regulations.

The Cincinnati, Ohio, company provided an update on its drone package delivery system in a conference call with investors to detail its third quarter financial report Monday.

In August, the FAA issued broad guidelines for commercial drone operation. The agency said, among other things, that drones used to deliver packages must meet weight restrictions and always be visible to operators.

“We plan on leading the way for drone delivery with our truck launched HorseFly delivery drone,” said Stephen Burns, chief executive of Workhorse Group.

The drone is designed to operate within the line-of-sight of the truck operator and should meet FAA requirements, he said.

“While we are not implying that the HorseFly system is suitable for all deliveries,” Burns said, “there are a number of situations where the HorseFly’s strengths and economies can be utilized to dramatically reduce costs and emissions commonly associated with last mile delivery.”

He said Workhorse Group is continuing to work with the University of Cincinnati’s aeronautical engineering program to refine its drone technology.

“Many of our fleet truck customers are in the business of delivering goods and moving people, and we feel that sophisticated manned and unmanned, electric and range extended aircraft will have a place in the delivery ecosphere,” Burn said.

E-commerce, once an afterthought of retailers, is now the fastest-growing sales avenue. While retail sales as a whole grew 2.7 percent year-over-year in September, non-store sales – which require package delivery – jumped almost 11 percent, according to the Census Bureau.

Ordering and paying online is now as easy, if not easier, than making a purchase in a brick-and-mortar outlet, but delivery is where things get dicey, Burns said.

“The Achilles heel is the shipping side,” he said. “We’re trying to find a way to reduce those costs – we’re trying to make vehicles as economic as possible and trying to make drivers more productive.”

The company’s sales in the third quarter came in at $1.9 million, up from $1.2 million in the second-quarter, bringing revenues in the first nine months of the year to $3.4 million, said Julio Rodriguez, Workhorse’s chief financial officer. This is the first year the company is reporting revenues as most of its sales last year were for prototypes, he said.

While the company is working on releasing its last-mile delivery drones, it’s already building and shipping electric trucks that are much more fuel efficient than their traditional fuel-based counterparts.

Workhorse Group has so far shipped about 80 its electric trucks that are generally used for short-haul or railyard-type work. UPS originally ordered about 125 of the vehicles, and recently added another 200 to the order, Burns said. UPS, as with other companies, tends to order vehicles once a year, which can stress small manufacturers such as Workhorse.

The package delivery company, however, has made an exception and made several “micro orders” for Workhorse’s vehicles, he said.

As Workhorse moves forward, it is finding ways to reduce production costs, Rodriguez said. The company spent $4.2 million in the third quarter that ended on Sept 30 to build its vehicles, giving it a gross margin of negative $2.2 million. Still, manufacturing costs will fall as the company learns where it can make necessary cost cuts and find other ways to save, he said.

“As manufacturing volume increases, we expect to benefit from volume pricing from suppliers,” Rodriguez said. “We are also in the process of reducing costs and achieving manufacturing efficiencies through advanced engineering to reach profitability faster than anticipated.”

Workhorse said research and development costs that were down to $1 million from $1.7 million in the same quarter last year will ramp up this year as the company raises spending for a partnership to build the Unites States Postal Service’s next-generation delivery vehicles.

The company also noted it has signed an agreement to provide several of its E-Gen hybrid vans to Cintas Corporation for a six-month field test in Cincinnati.

The test will “enable Cintas to deploy the vehicle in a real-world environment on delivery and service routes, with the potential to add more trucks being deployed in additional routes in Cintas’ national fleet system,” Cintas said in a statement.

Workhorse last week announced another new product – its W15 pickup truck that has a range of about 80 miles on electric power alone, though it will have a range-extending gasoline powertrain. Delivery is set for late 2018, Burns said.

"Millions of pickup trucks are sold in the U.S. each year and to our knowledge the W-15 is presently the only plug-in electric, range-extended pickup truck that is being developed from the ground up,” he said. “Because most of our target fleets drive 80 miles or less on most days, coupled with our reduced maintenance, low-emission, and value added telematics package, we believe we can sell the W-15 at a price point that makes the W-15 an economically attractive vehicle."